A look at a household’s balance sheet
Most people understand that a household’s net worth is equal to: Assets – Liabilities. However, many people do not realize that the location of their assets and liabilities within their balance sheet do not make a difference in terms of their overall net wroth.
I was reminded of this lesson recently while reading the book “Borrow Smart Retire Rich”. Here is a look at a sample household’s balance sheet:
| Sample balance sheet | |||
| Assets | Value | Liabilities | Value |
| Checking | $ 10,000 | Mortgage | $ 160,000 |
| Savings | $ 15,000 | Auto Loans | $ 35,000 |
| Investments | $ 175,000 | Credit Cards | $ 5,000 |
| House | $ 200,000 | ||
| Total | $ 400,000 | Total | $ 200,000 |
| Net worth | $ 200,000 | ||
In the next balance sheet the sample household takes $5,000 from their checking account and places it into their investment account. Although the location of the assets change, the overall net worth does not change.
| Balance sheet-$5,000 moved from checking into investments | |||
| Assets | Value | Liabilities | Value |
| Checking | $ 5,000 | Mortgage | $ 160,000 |
| Savings | $ 15,000 | Auto Loans | $ 35,000 |
| Investments | $ 180,000 | Credit Cards | $ 5,000 |
| House | $ 200,000 | ||
| Total | $ 400,000 | Total | $ 200,000 |
| Net worth | $ 200,000 | ||
In the next example the same household moves $5,000 from their checking account and pays-off their credit card debt. Again, the location of the assets change but their overall net worth does not.
| Balance sheet- $5,000 moved from checking to pay-off credit cards | |||
| Assets | Value | Liabilities | Value |
| Checking | $ 5,000 | Mortgage | $ 160,000 |
| Savings | $ 15,000 | Auto Loans | $ 35,000 |
| Investments | $ 175,000 | Credit Cards | $ - |
| House | $ 200,000 | ||
| Total | $ 395,000 | Total | $ 195,000 |
| Net worth | $ 200,000 | ||
*
Posted: October 1st, 2008 under Personal Finance.
Tags: balance sheet, household wealth, location, location of assets and liabilities
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Time October 1, 2008 at 8:24 pm
[...] A look at a household’s balance sheet [...]
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Time October 1, 2008 at 5:13 pm
[...] A look at a household’s balance sheet [...]